My philosophy is that it is hard, but not impossible, to beat the market, and that it is easy, and imperative, to save on taxes and money management costs. I graduated from Harvard in 1973 with a degree in linguistics and applied math. I have been a journalist for 40 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. You can email me at --williambaldwinfinance -- at -- gmail -- dot -- com.

Tax-Wise Commodity Investing

Inflation is tame and commodities are having a ragged year—so now is a great time to buy commodities. No sense buying hard assets when everyone else is.

There’s more than one way to bet on gold, oil and copper. Let’s look at a few, paying particular attention to the costs and tax rules. It gets tricky, since Congress (motto: We keep you entertained) has created no fewer than six tax regimes for commodity investments.

Bullion. For long-term investors the best buy in exchange-traded gold funds is ISHARES GOLD TRUST (IAU, 12.95), at a cost of 0.25% annually. The better-known SPDR Gold (GLD, 130) is more liquid but costs 0.4%.

Alas, shares of funds that own metals are taxed as “collectibles.” That is, Congress has determined that IAU is more akin to a Mickey Mantle rookie card than to a share of Google. The federal tax on long-term gains in collectibles is a steep 28%. (This and other tax rates here don’t include the potential 5% hit from ObamaCare and a deduction clawback.)

The tax cloud on precious metals has, if you will, a silver lining, says Robert Gordon, whose Twenty-First Securities Corp. specializes in tax optimization for investors. If IAU is a collectible rather than a security, he argues, then it’s not subject to the wash sale rule. If you got caught in this year’s bear market for gold, you should be able to sell a bullion fund and then immediately buy it back without losing your right to the capital loss deduction.

Futures. Commodity futures traded in the U.S. have a weird tax treatment, engineered by a creative congressman who wound up in the slammer. His creation lives on: Paper gains and losses are recognized annually, and it is assumed, no matter how long you have held a position, that the gain or loss is 60% long-term and 40% short-term.

The blended rate comes out to 23% or less for joint-return filers with incomes below $450,000, so these investors are often better off owning gold futures than gold funds. The cost of rolling over futures contracts is roughly the same as holding a bullion fund.

Pools. The PIMCO COMMODITY REAL RETURN STRATEGY FUND (PCRDX, 5.67) has $16 billion invested in commodity derivatives and short-term bonds. It has earned 5.4% a year over the past five years after fees running 1.19% a year.

Taxes? Not so nice. To evade a silly law on commodity holdings by mutual funds (your Congress at work), Pimco runs its bets through a Cayman Islands entity, with the side effect that 60/40 capital gains treatment becomes hard to get. Most of the fund’s profits have been highly taxed ordinary income.

Contrast the POWERSHARES DB COMMODITY INDEX TRACKING FUND (DBC, 26), a $6 billion basket of energy, metal and agricultural futures with a 0.85% expense ratio. This beast is a partnership, not a fund, with the result that you get the 60/40 split on most of the positions. Downside: The management fee mysteriously turns into a usually nondeductible “miscellaneous” deduction. Why? Ask your congressman.

Stuff. If you hold something nonmetallic for at least a year, like corn, you get better tax treatment than if you hold a future. But mice might get in.

Stocks. Investors who own shares of resource producers pay low taxes on both dividends and long-term gains. And if they crib from the experts they pay no fee. Here are four ideas plucked from the filings of Grantham, Mayo & Van Otterloo, a Boston money manager: CHEVRON (CVX, 120), in oil and gas; VALE (VALE, 16.01), which digs up iron ore; MINAS BUENAVENTURA (BVN, 14.05), which has Peruvian gold and silver; and SOUTHERN COPPER (SCCO, 29), with mines in Chile and elsewhere.

Postscript: Three years ago I published a story on the gold-buying mania, concluding that the shiny metal wasn’t going to do much to help people retire in comfort. Since then GLD has returned a compound average 0% annually, the S&P 500 17%.

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